‘Investment Bulletin’ by William Forsyth, Investment Manager.
Market uncertainty has expressed itself in a rise in volatility, which is not unusual in summer months. Although the adage “Sell in May” is not as accurate as it once was, it does still point to thinner trading over the long holiday period, which can lead to greater fluctuation in share prices. Many also argue that politics has contributed to greater uncertainty than it has for many years. We have seen the Washington Post attempting a rerun of Watergate, and Theresa May showing a lack of judgement in political party momentum. But is it possible that the situation could be more stable than the media is representing? For all the noise made in Washington, the press has not yet found a direct Presidential link to Russian spoilers and, while not the prettiest political alliance, the DUP and Conservatives relationship should bring a lull – unless the Tories overplay their hand in Europe. Politicians may be unpopular but they are there to stay unless unseated by democratic process.
In the meantime, what is happening to profits and the economy? Interest rates remain low despite expectations that they will rise. Historically, rises in short term rates have depressed long term rates. Inflation is due to pick up in the UK, but there is a lack of conviction about it and it may ease back again. In both the UK and the US, more people are employed but wage growth is below the rate of inflation. Commodities are not that strong either. Against a background of very low interest rates, equities have a history of climbing a “wall of worry”.
We are paying particularly close attention at present to the potential withdrawal of the funds released by Quantitative Easing. This is one factor that could really put pressure on interest rates. However, with popular opinion suggesting that homeowners could not cope with any significant increase in interest rates and house prices beginning to stall, the US Fed and the Bank of England will have to be very careful about sudden undue movement.
Additionally, there is growing concern about the vast size of outstanding debt on car purchase. These issues need careful planning in terms of stabilisation, and it will probably take some form of government intervention to control credit guidelines before any greater squeeze on interest rates can be tolerated.
In summary, our view is that the key factor affecting markets is interest rates. While low interest rates are usually good for equities, we are being cautious on some quasi bonds areas such as student housing, which are beginning to show strain in less popular areas. Renewables also require care. With France and some car makers predicting the demise of fossil fuel cars, the corollary is an improvement in electric vehicles and, in particular the batteries that dictate their effectiveness. If Tesla and others really do make huge strides in battery efficiency the general cost of power should fall. Solar power, wind and hydro companies would all be able to store unused energy, and logic suggests lower prices will follow. Not so good for these bond proxies, but another long-term reason to be cheerful about equities.
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